If you’re applying for a loan, mortgage or any other form of credit, the lender will carry out a credit check. You’ve probably heard of this process, but what exactly does it mean?
Understanding what a credit check is and how it works may help you navigate the financial world with confidence. In this guide, we’ll cover all the important information surrounding credit checks so you’re able to apply for a loan with ease.
You’ll discover:
- What a credit check is
- How credit checks work and when they are required
- Soft and hard credit checks
- The impact of checks on your credit score and how to prepare
Need more advice on credit checks or how to apply for a loan? We have a dedicated Help & Advice page for more information.
What is a credit check?
A credit check or credit search involves analysing your financial behaviour to determine how reliable you are with money. When someone reviews your credit file, they’ll examine your borrowing history and how quickly you repay your debts. A report is then created which contains any public records, existing debts and repayment history.
When are credit checks required?
There are a number of circumstances where a credit check may be required, including:
- During loan applications, including personal loans, secured loans, car loans or applying for a student loan
- During credit card applications
- As part of property rental or buyer checks. Landlords or their agencies carry these out to assess affordability and financial stability.
- As part of the mortgage application when purchasing a home
- As part of the employment screening process for potential employees..
- When setting up utilities services, including gas, electric and mobile phone contracts.
What information is reviewed during a credit check?
When a credit check is made, a variety of information is gathered and assessed. This helps to determine your credit score and verify your identity.
Firstly, you’ll need to provide your personal information. This includes your full legal name, date of birth and your home address. You’ll need to give details of your current home and any previous addresses spanning the past six years. This information helps to assess your identity and confirm your residency.
The check will also dive into your finances, including:
- Your credit history, including any credit cards, loans or overdrafts from the last 6 years.
- Whether payments were missed, late or paid on time.
- How much (if any) credit you’re using from a set allowance. This is known as your credit utilisation. This is the percentage you’ve used of your available credit.
- Public records or court records, CCJs, evidence of previous bankruptcy or IVAs
- Financial associates, for example, those who share a mortgage or joint bank account with you.
- Any records of other companies that have conducted hard credit checks in the past year
What is a soft credit check?
A soft credit check is a top-level review of your credit profile that doesn’t affect your credit score. It often happens without you even realising it, like when you check your credit report or apply for a pre-approved offer.
Soft checks are only used to determine your eligibility and estimate quotes.
What is a hard credit check?
A hard credit check has a more significant impact on your financial profile. This check requires your permission and occurs when a lender or financial institution formally reviews your credit history.
Hard checks are part of the decision-making process when you apply for a loan, mortgage or credit card. They may temporarily lower your credit score.
If you apply for multiple credit accounts in a short period, lenders may interpret this as a sign of financial instability. To avoid this, try to space out applications and only request credit when necessary. Being selective about your applications helps protect your score while demonstrating to lenders that you’re responsible.
How do credit checks work?
Credit checks are carried out through a network of credit bureaus, such as Experian, Equifax and TransUnion, which collect and store your financial data. When a lender or landlord requests a credit check, they access your report through one of these bureaus.
Your credit report acts as your financial CV, summarising your borrowing history and payment patterns. Lenders use this information to calculate your credit score, a number that represents your creditworthiness.
This score helps them predict how likely you are to repay a loan on time. Different lenders have different criteria, but a higher score usually makes it easier for you to secure favourable terms such as lower interest rates.
Why are credit checks carried out?
Credit checks help organisations assess risk. These checks give them an understanding of how you manage your financial obligations. Lenders want to extend credit to reliable borrowers and avoid risking defaults. Landlords want tenants who won’t miss rent payments, as evictions are costly and disruptive.
Even employers in financial or security-sensitive industries may check your credit. They use this to gauge how well you handle personal finances, as it could reflect on your trustworthiness.
What's the impact of credit checks on credit scores?
Soft checks don’t show up on your report to lenders or affect your credit score, but hard credit checks leave a visible record on your credit file. Each hard inquiry may have a slightly negative impact on your score, but the impact is usually minor or temporary.
Problems arise when multiple hard inquiries occur within a short time. This could signal that you’re desperate for credit, making you seem like a higher-risk borrower. To protect your score, always research eligibility criteria before applying to reduce the chance of rejection.
How do I prepare for a credit check?
Start by requesting a copy of your credit report from all major bureaus. There are several ways you can check your credit report without any cost, so take advantage of them to review your financial data. Check for errors such as incorrect addresses or payment records that don’t match and dispute any inaccuracies. This will ensure all information is accurate and reduce the rate of rejection due to incorrect financial information.
If your score needs improvement, focus on paying your bills on time and reducing your credit use. Keeping your credit card balances below 30% of your limit shows lenders that you are able to manage debt responsibly.
Finally, only apply for credit when you genuinely need it. Plan ahead for major applications, whether it’s a mortgage or a car loan, and space them out to minimise hard searches.
Check your eligibility with Evolution Money
Hopefully, you’ll now have a better understanding of credit checks and how they shape your finances. If you’re considering applying for a secured loan, you can check your eligibility with us today without affecting your credit score.
At Evolution Money, we may be able to help you secure a loan that suits your credit score. We provide loans ranging from £5,000 to £105,000, with repayment terms spanning 3 to 20 years. With an exceptional Feefo customer rating, we’re a tried and trusted loan provider.
If you need more guidance on credit checks or how the process affects loan applications, we’re here to help. Get in touch today on 0161 814 9158 and a member of our team can offer expert advice.
All loans are subject to status and eligibility. Available to UK homeowners aged 21 or over. Terms and conditions apply. Not all applicants will be accepted.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it.
Representative 17.46% APRC (Variable)
For a typical loan of £23,120 over 120 months with a variable interest rate of 17.46% per annum, your monthly repayments would be £442.07. This includes a Product Fee of £2,312.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £53,047.80. Annual Interest Rates range between 8.6% to 27.87% (variable). Maximum 50.00% APRC. *Lending Fee varies by country: England & Wales £763, Scotland £1,051, Northern Ireland: £1,736.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
